EXCELLIGENCE LEARNING CORP - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2004

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 0-32613

EXCELLIGENCE LEARNING CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Delaware

77-0559897

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

2 Lower Ragsdale Drive

Monterey, CA

93940

(Address of Principal Executive Offices)

(Zip Code)

Registrant’s Telephone Number, Including Area Code: (831) 333-2000

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, $.01 par value, 8,756,287 shares outstanding as of May 7, 2004.

EXCELLIGENCE LEARNING CORPORATION

TABLE OF CONTENTS



	Forward-Looking Statements	1

PART I:	FINANCIAL INFORMATION	2

Item 1.	Financial Statements	2

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	15

Item 4.	Controls and Procedures	15

PART II:	OTHER INFORMATION	16

Item 1.	Legal Proceedings	16

Item 2.	Changes in Securities and Use of Proceeds	16

Item 3.	Defaults Upon Senior Securities	16

Item 4.	Submission of Matters to a Vote of Security Holders	16

Item 5.	Other Information	16

Item 6.	Exhibits and Reports on Form 8-K	16

SIGNATURE		17

Forward-Looking Statements

Certain information included in this Quarterly Report on Form 10-Q and other materials filed or to be filed by the Company with the Commission (as well as information in oral statements and other written statements made or to be made by the Company) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary language noting important factors that could cause actual results to differ materially from those projected in such statements. Such forward-looking statements involve risks and uncertainties that could significantly affect anticipated results in the future and include information relating to plans for future expansion and other business development activities as well as other capital spending, financing sources and the effects of regulation, competition, integration of acquired businesses, enhancement of the Company’s technology and protection of the Company’s intellectual property. As such, actual results may vary materially from those projected, anticipated or indicated in any forward-looking statements.

When used in this Quarterly Report on Form 10-Q and in other statements made by or on behalf of the Company, the words “believes,” “anticipates,” “expects,” “plans,” “intends,” “expects,” “estimates,” “projects,” “could” and other similar words or expressions, which are predictions of or indicative of future events, conditions and trends, identify forward-looking statements. Such forward-looking statements are subject to a number of important risks, uncertainties and assumptions that could significantly affect anticipated results in the future. These risks, uncertainties and assumptions about the Company and its subsidiaries include, but are not limited to, the following:

•

the Company’s ability to diversify product offerings or expand in new and existing markets;

•

changes in general economic and business conditions and in the educational products or e-retailing industry in particular;

•

the impact of competition, specifically, if competitors were to either adopt a more aggressive pricing strategy than the Company or develop a competing line of proprietary products;

•

the level of demand for the Company’s products;

•

fluctuations in currency exchange rates, which could potentially result in a weaker U.S. dollar in overseas markets, increasing the Company’s cost of inventory purchased; and

•

other factors discussed in Item 1 under “Risk Factors” in the Company’s Annual Report on Form 10-K.

In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Quarterly Report on Form 10-Q might not occur.

The Company has based its forward-looking statements on current expectations and projections about future events and assumes no obligation to update publicly any forward-looking information that may be made by or on behalf of the Company in this Quarterly Report on Form 10-Q or otherwise, whether as a result of new information, future events or otherwise, except to the extent the Company is required to do so under applicable law.

PART I

FINANCIAL INFORMATION

Item 1.

Financial Statements.

EXCELLIGENCE LEARNING CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except for par value and share amounts)

(Unaudited)


	March 31, 2004			December 31, 2003*
ASSETS
Current assets :
Cash and cash equivalents	$	2,857		$	3,620
Accounts receivable, net		5,259			5,480
Inventories		20,427			15,133
Prepaid expenses and other current assets		3,189			2,937
Deferred income taxes		1,315			1,214

Total current assets		33,047			28,384
Property and equipment, net		4,493			4,070
Deferred income taxes		6,860			6,367
Other assets		302			307
Goodwill		5,878			5,878
Other intangible assets, net		875			918

Total assets	$	51,455		$	45,924

LIABILITIES, REDEEMABLE SECURITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	9,171		$	3,018
Accrued expenses		3,094			2,955
Income tax payable		31			234
Other current liabilities		335			186

Total current liabilities		12,631			6,393

Redeemable common shares, 100,000 shares authorized, issued and outstanding at December 31, 2003		—			400

Stockholders’ equity:
Common stock, $0.01 par value; 15,000,000 shares authorized; 8,731,287 and 8,549,423 shares issued and outstanding at March 31, 2004 and December 31, 2003, respectively		87			85
Additional paid-in capital		62,849			62,353
Deferred stock compensation		(782	)		(920	)
Accumulated deficit		(23,330	)		(22,387	)

Total stockholders’ equity		38,824			39,131

Total liabilities, redeemable securities and stockholders’ equity	$	51,455		$	45,924

*	Derived from audited consolidated financial statements filed in the Company’s 2003 Annual Report on Form 10-K.

See accompanying notes to condensed consolidated financial statements.

EXCELLIGENCE LEARNING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except for share and per share amounts)

(Unaudited)


	Three Months Ended March 31,
	2004			2003
Revenues	$	19,836		$	17,418
Cost of goods sold		12,928			11,290

Gross profit		6,908			6,128

Operating expenses:
Selling, general and administrative		8,506			8,027
Amortization of other intangible assets		43			75

Operating loss		(1,641	)		(1,974	)

Other (income) expense:
Interest expense		5			32
Interest income		(2	)		(5	)

Loss before income taxes		(1,644	)		(2,001	)
Income tax benefit		701			853

Net loss	$	(943	)	$	(1,148	)


Net Loss Per Share Calculation:
Net loss per share – basic and diluted	$	(0.11	)	$	(0.14	)

Weighted average shares used in net loss per share calculation – basic and diluted		8,688,474			8,471,463

See accompanying notes to condensed consolidated financial statements.

EXCELLIGENCE LEARNING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Three Months Ended March 31,
	2004			2003
Cash flows from operating activities:
Net loss	$	(943	)	$	(1,148	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		427			421
Provision for losses on accounts receivable		(115	)		25
Equity-based compensation		138			143
Deferred income taxes		(594	)		(853	)
Changes in operating assets and liabilities, net of assets and liabilities assumed in acquisition:
Accounts receivable		336			(382	)
Inventories		(5,294	)		(7,304	)
Prepaid expenses and other current assets		(252	)		258
Other assets		5			18
Accounts payable		6,153			6,526
Accrued expenses		139			(22	)
Income tax related liabilities		(203	)		(3	)
Other current liabilities		149			(37	)

Net cash used in operating activities		(54	)		(2,358	)

Cash flows from investing activities:
Purchase of property and equipment		(807	)		(323	)
Acquisition of Marketing Logistics, Inc.		—			(827	)

Net cash used in investing activities		(807	)		(1,150	)

Cash flows from financing activities:
Borrowings on line of credit		—			12,852
Principal payments on line of credit		—			(8,457	)
Exercise of employee stock options		98			13

Net cash provided by financing activities		98			4,408

Net (decrease) increase in cash and cash equivalents		(763	)		900
Cash and cash equivalents at beginning of period		3,620			2,713

Cash and cash equivalents at end of period	$	2,857		$	3,613

Supplemental disclosures of cash flow information:
Issuance of redeemable common shares in acquisition	$	—		$	400
Cash payments during the period:
Cash paid for interest	$	—		$	2
Cash paid for taxes	$	96		$	3

See accompanying notes to condensed consolidated financial statements.

EXCELLIGENCE LEARNING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) The Business

Excelligence Learning Corporation, a Delaware corporation, is a developer, manufacturer and retailer of educational products, which are sold to child care programs, preschools, elementary schools and consumers. Excelligence Learning Corporation’s business is primarily conducted through its wholly-owned subsidiaries, Earlychildhood LLC, a California limited liability company (“Earlychildhood”), Educational Products, Inc., a Texas corporation (“EPI”), Marketing Logistics, Inc., a Minnesota corporation d.b.a. Early Childhood Manufacturers’ Direct (“ECMD”), and SmarterKids.com, Inc., a Delaware corporation (“SmarterKids.com”).

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (which are normal and recurring in nature) considered necessary for a fair presentation have been included. The balance sheet at December 31, 2003 was derived from the audited consolidated financial statements of Excelligence Learning Corporation (together with its wholly-owned subsidiaries, the “Company”) for the fiscal year ended December 31, 2003. For further information, refer to the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Seasonality

The Company’s seasonal sales trends coincide with the start of each school year. Accordingly, approximately 50% of the Company’s consolidated annual sales are generated in the third quarter. The working capital needs of the Company are greatest in the second quarter as inventory levels are increased to meet seasonal demands.

Equity-Based Compensation

The Company has adopted SFAS No. 123, Accounting for Stock-Based Compensation to account for its equity-based compensation plans. As permitted by SFAS No. 123, the Company measures compensation cost in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, no accounting recognition is given at the date of grant to stock options granted to employees with an exercise price equal to the fair market value of the underlying common stock. Upon exercise, net proceeds, including income tax benefits realized, are credited to equity. Compensation cost for stock options granted with exercise prices below the fair market value of the underlying common stock is recognized over the vesting period.

SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, amended SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation (in thousands, except for share and per share amounts):


	Three Months Ended March 31,
	2004			2003
Net loss, as reported	$	(943	)	$	(1,148	)
Add: stock-based employee compensation expense included in reported net income, net of related tax effects		138			143
Deduct: stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		436			222

Pro forma net loss	$	(1,241	)	$	(1,227	)

Net loss per share calculation:
Net loss per share – basic and diluted, as reported	$	(0.11	)	$	(0.14	)

Net loss per share – basic and diluted, pro forma	$	(0.14	)	$	(0.15	)

Weighted average shares used in net loss per share calculation – basic and diluted		8,688,474			8,471,463

The fair value of these options was estimated using the Black-Scholes model, with the following weighted average assumptions:


	Stock Options
Three Months Ended March 31,	2004		2003
Expected life (in years)	9.6		8.5
Risk-free interest rate	4.58	%	3.86	%
Volatility	99.0	%	82.0	%
Dividend yield	0.0	%	0.0	%

Recent Accounting Pronou